Trade Alert: A Rally Is Building in Lowe’s

Today, I’m recommending a short-term trade in Lowe’s Companies Inc. (NYSE: LOW) to benefit from its imminent rally. In fact, I expect us to grab our profits in less than six weeks.

Before I get into the trade specifics, though, let’s look at why Lowe’s is a buy.

As you know, all Peak Velocity Trader recommendations are based on four lines of computer code.

Let’s review the four requirements that need to be met to trigger a buy for us:

Rule 1: First, the stock market needs to be above its 200-day moving average for us to consider taking a bullish position. The S&P 500 is about 6.8% above its moving average right now.

Rule 2: The stock needs to be trading within 1% of its 52-week high. Lowe’s meets this requirement as illustrated by the indicator in the center of the chart. The blue line shows the stock’s closing price as a percentage of the 52-week high. That line is at a value of 100, indicating Lowe’s closed at its 52-week high on Friday.

Our stocks are considered buys when this value is above 99, a level marked by the green horizontal line.

3 Buy Signals for LOW

See larger image

Rule 3: The stock’s relative strength (RS) needs to be above its 26-week average as well. The RS’ moving average is shown as the black line in the center of the chart. Lowe’s RS is 9.4% above its moving average.

Rule 4: Finally, its five-day Relative Strength Index (RSI) needs to be above 70. (This is my timing indicator — it confirms the stock is reaching peak velocity right now.) Lowe’s is at 77.68. This is shown in the bottom part of the chart, where the most recent green bar signals the stock is above the buy level.

Quick Recap for New Readers

Now, if you’re new to Peak Velocity Trader, first, I’d like to say welcome! I’m excited to have you join the team and profit from our momentum trades.

When you have a moment, I suggest reading my first trade alert to see a quick reminder on how to use our strategy successfully. In it, I recap the information you can find in our trading manual and other Getting Started materials. Click here to view it now.

You can also click here to read my latest FAQ issue, where I answer many of the questions I’ve received from new readers, including how to open an options account.

In fact, for those of you who may be new to trading options, I created a video. It’s a quick, six-minute webinar in which I walk you through placing a trade with Interactive Brokers.

(Click here to view the webinar.)

Of course, your platform may look different depending on your broker, but I hope this tutorial gives you a better idea of the mechanics of entering a trade.

And if you’re still hesitant to make your first options trade, you can always follow along with the first couple of alerts by paper trading. Don’t feel like you have to make every trade right away. After all, I’ve added two weeks to your subscription period so you have time to get completely comfortable with our system.

With that said, let’s get to trading…

Your Trade Details

You are probably familiar with Lowe’s.

The company is a big box, home improvement retailer serving more than 17 million customers a week through its 2,365 stores in the United States, Canada and Mexico, and online. Its fiscal year 2017 sales topped $65 billion. (Like most retailers, the company’s fiscal year concludes at the end of January, so there’s time to include holiday sales and returns in its financial reports.)

At its current price, Lowe’s is slightly undervalued — which presents a great opportunity for us. On average, the stock has traded with a price-to-earnings (P/E) ratio that’s about 5% higher than the industry average. Based on that average, the stock is now underpriced by about 2.5%.

That might not seem like much, but by using options, we can enjoy large rewards from small trading edges like this.

Moreover, I don’t expect Lowe’s to remain undervalued for long.

In fact, I expect the stock’s valuation to increase over the next few weeks. The company is expected to announce its earnings before the open on May 19. And over the past five years, shares have gained an average 3% the week after that announcement.

I expect that uptrend to emerge once again since this should be a strong quarter for the company.

See, every month, the Census Bureau issues a report on retail sales. The most recent report was released on April 14, and it contained data through the end of March.

Overall, retail sales grew 5.4% in the first quarter of 2017 compared to a year ago. Meanwhile, sales at stores classified as “building material and garden equipment and supplies dealers,” which includes Lowe’s, grew by 6.7% — beating expectations. Management had previously told analysts to expect 5% sales growth.

This all indicates Lowe’s should deliver a stronger-than-expected report for the quarter.

Management is also likely to deliver a positive outlook for the rest of the year.

We know the company has taken steps to lower its expenses — and this should result in higher earnings. Last month, Lowe’s refinanced $1.6 billion in debt to lower its interest expenses. Management should provide more details in the earnings release, but I expect its savings to total at least $24 million a year.

This will also be the first quarter of results showing the impact of recent layoffs. A new store staffing model and an 11% reduction in staff at the company’s headquarters were expected to increase operating earnings by about 1.2%.

Combined, the two initiatives should increase earnings per share by at least $0.30 per year. When the results are announced, assuming the company performs in line with my expectations, analysts should increase their earnings estimates for the full year.

This should drive the stock price higher in the short term. With a call option in the stock, we will be ideally positioned to benefit from that price move.

For the specifics on the trade, I recommend a June $87.50 call option.

Trade Recommendation

Buy Action to Take
Stock: Lowe’s Companies Inc. (LOW)
Option Type: Call Option
Expiration: Jun-16-2017
Strike Price: $87.50
Option Symbol: LOW170616C00087500
Action: Buy to Open
Order Type: Limit Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: $1.75 (Please refer to the below buyzone chart for other options.)
Trade Deadline: If your order is not filled by my  next alert, I’ll update you on the trade.
Note: Do not place a market order. Set the limit order at $1.75 or less, as shown with my buyzone chart.
Once this order is filled, place the following order:
Sell Action to Take
Stock: Lowe’s Companies Inc. (LOW)
Option Type: Call Option
Expiration: Jun-16-2017
Strike Price: $87.50
Option Symbol: LOW170616C00087500
Action: Sell to Close Half
Order Type: Limit Order
Duration: GTC (Good ‘Til Canceled)
Limit Price: Whatever nets you a 100% gain based on your entry price.
Trade Deadline: Keep this order open until it is filled or canceled.
Note: This second order will allow us to collect a 100% gain on half of our position in the event that a quick move happens before I can get a trade alert out to you.

Next is our buyzone chart. I suggest buying up to the middle limit order for the best value. But there is still room for a significant profit if you pay less than the “Very Expensive” price in the chart.

So if you choose to do so, you can use my “Expensive” and “Very Expensive” prices. It’s up to you. I simply want to give you as many options to benefit from this trade as possible.

Lowe’s Companies Inc. (NYSE: LOW) June $87.50 Calls

BUYZONE
Cheap Less
Cheap
Middle
(Recommended Limit Price)
Expensive Very
Expensive
$1.60
-8.6%
$1.70
-2.9%
$1.75 $1.85
5.7%
$1.90
8.6%
Use the limit price based on your preference. I suggest up to the middle zone for the best value.

That’s all for now. I’ll continue to follow this trade, and I will update you whenever anything noteworthy happens — such as taking a 100% gain on the first half of this position. If you have any questions though, please don’t hesitate to email me at peakvelocity@banyanhill.com.

And if you haven’t signed up for my complimentary text-alert service yet, please go ahead and do so now by clicking here. This will notify you if there’s ever any need to act in one of my emails.

I Need Your Help

Before I sign off, I would like to ask for your thoughts on the first chart in this trade alert.

I am trying to sum up a lot of information for you, and there could be a better way to do that. So please tell me what you think: What do you like best about the chart? What could be different? I appreciate all your help in making my alerts more user-friendly.

In fact, I plan to ask this from time to time.

I learned to ask for help with my chart designs many years ago when my youngest daughter was in kindergarten. Back then, she would sit next to me at my desk as I worked on building my trading systems. At the age of 5, she was filled with so many questions, and one night, she asked how we knew when to buy and sell.

As I walked her through the lines of code to explain, she asked something I’ll never forget: “Why can’t you just put arrows on the chart?”

To be honest, I’d never thought of that — my mind was too immersed in the coding aspect. It took less than a minute to add the arrows, and then she asked if they could be colored green for buy and red for stop. Her simple ideas improved my charts greatly — and I learned to ask for input on chart design that night.

So if you have any thoughts, please email me at peakvelocity@banyanhill.com. I know there’s probably a better way to illustrate my ideas, and I am certain with all of your suggestions, I’ll find the answer.

Regards,

Michael Carr, CMT
Editor, Peak Velocity Trader